What is an Adverse Action Notice, and How Do You Handle It?

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If you get turned down for a loan, line of credit, insurance or benefits, an adverse action notice will explain why. Although you might not be able to improve your credit overnight, knowing what’s wrong can help you take steps in the right direction.

To see how an adverse credit notice works, and how it can help you identify and address the problems on your credit report, let’s address the following questions:

What is an adverse action notice?

If your application for credit, insurance or employment is denied due to something on your consumer report, the creditor may be required to send you an adverse action notice.

Specifically, you can expect to receive an adverse action notice if…

  • Your application for credit is denied.
  • You’re not offered credit in the amount or with the terms you requested.
  • Negative changes were made to the terms of one of your accounts due to information in your credit report.

What could these scenarios look like in the real world? Well, let’s say that you apply for a credit card and are turned down. If you have poor credit, you probably won’t be surprised by this outcome. But if you have excellent credit, you might wonder why you were rejected.

Once the adverse action notice comes along, you might find out that you simply left key information out of your application. You were denied due to an incomplete application, so you can easily take steps to remedy the situation.

When will you receive your adverse action notice?

If any of these situations occur, you can expect to receive an adverse action notice within 30 to 90 days. The exact timeframe depends on the action that has taken place:

  • Within 30 days if you faced an adverse action on an incomplete application
  • Within 30 days after an action on one of your existing accounts
  • Within 90 days after you did not accept a counteroffer to an application for credit

What are the two types of adverse action notices? FCRA vs. ECOA

Since there are two regulations governing adverse action notice requirements, what’s in the letter itself can vary.

First, there’s the adverse action notice dictated by the Fair Credit Reporting Act (FCRA). There’s also the adverse action notice dictated by the Equal Credit Opportunity Act (ECOA).

Here’s an abbreviated version of adverse action notice requirements as they pertain to each law. You can also check out Consumer Compliance Outlook for more detailed descriptions.

FCRA adverse action notice requirements

What is an FCRA adverse action notice? According to Consumer Compliance Outlook: “The FCRA’s requirements for adverse action notices apply only to consumer transactions and are designed to alert consumers that negative information was the basis for adverse action.”

Examples of consumer transactions include denial for credit, insurance, employment, government licenses, government benefits or rentals. You may also experience increased charges for everything just listed, or unfavorable changes to existing terms for them.

ECOA adverse action notice requirements

The ECOA adverse action notice takes effect when a credit application is denied. It also takes effect if a counteroffer on an application is refused by the consumer. According to Consumer Compliance Outlook:

“Adverse action notices under the ECOA and Regulation B are designed to help consumers and businesses by providing transparency to the credit underwriting process and protecting against potential discrimination by requiring creditors to explain the reasons adverse action was taken.”

Additionally, it takes effect if an application to increase credit on an existing account is denied. But if a consumer withdraws their application or accepts a counteroffer, there is no adverse action notice requirement.

The most important thing to remember is this: the adverse action notice requirements under ECOA only apply to credit. The FCRA adverse action notice, meanwhile, applies to credit and other types of applications, as listed above.

How should you read an adverse action notice?

An adverse action notice should be fairly straightforward. That’s because its main purpose is to tell you why your application was denied. Some common reasons include:

  • Incomplete application
  • Insufficient income
  • Employment that can’t be verified
  • Poor or thin credit
  • Delinquent accounts
  • Foreclosures
  • Bankruptcies

Along with providing an explanation of your denied credit, your notice must also include the following, according to Federal Trade Commission (FTC) requirements:

  • Name, address and phone number of the credit-reporting agency (CRA).
  • Your credit score if it was used in the decision-making process.
  • Statement explaining why the denial happened.
  • Your right to a free copy of the credit report from the CRA.
  • Your right to dispute the information on the report.

If you receive an adverse action notice from a CRA, make sure all of this is included. And remember, it’s your right to receive this information.

How can you improve your financial standing? 6 steps

Having your application denied is frustrating.

But a notice of adverse action can actually be a good thing. It’s designed to enforce fair treatment of applicants and to empower you for improving your chances for approval the next time around.

So how can you turn what you’ve learned from an adverse action notice into future approval? Follow these six steps:

1. Get your credit report
2. Fix any errors on your credit report
3. Understand the factors playing into your credit score
4. Make all of your payments on time
5. Focus on paying down debt
6. Keep checking your credit report

1. Get your credit report

Your credit report is a detailed list of your financial accounts provided by a credit reporting agency like Experian.

That’s why you should be given access to a free copy of your credit report when you get an adverse action notice. Make sure you follow the instructions on your notice to get your copy.

2. Fix any errors on your credit report

Believe it or not, credit reporting errors are common. This is one reason it’s so important to check yours after receiving an adverse action notice.

Read through your personal information and make sure it’s correct. Even one digit off of a Social Security number is a big error. Then, make sure every account on the list is yours.

If you spot anything that’s incorrect, follow these steps immediately to dispute any errors.

3. Understand the factors playing into your credit score

Your credit score is calculated and based on a variety of factors. But you don’t have to score perfectly on all points. Each factor is valued differently. That’s why your score comes in a range.

What’s more, we all have more than one credit score. Therefore, the following two steps focus on the two most important factors of your credit score.

4. Make all of your payments on time

Your payment history makes up 35% of your FICO Score. That means you can easily improve your score by making your payments on time.

Just make sure you pay all of them on time. Even things like library fines or making late payments on cellphone bills, electric bills, etc., can show up on your report.

Also, keep in mind that a creditor can report you as delinquent as soon as 30 days after your payment is due. So if you don’t think you’ll be able to make your payments, talk to your creditor to see if you can come up with a new payment plan ASAP.

5. Focus on paying down debt

Credit utilization makes up 30% of your score. This is the amount of credit available to you versus the amount of debt you have.

So if you have a credit card with a $1,000 credit limit and a $500 balance, then that card has a 50% credit utilization. Ideally, you want to keep your utilization at 30% or below.

6. Keep checking your credit report

Don’t just check your credit report once, do it annually.

The good news is you can get a free copy of your report from all three credit reporting bureaus from AnnualCreditReport.com (Normally these are offered on an annual basis, though it was expanded to weekly reports during the coronavirus pandemic.)

Then, stay on top of what’s on your credit report to make sure you never receive an adverse action notice due to errors on your report.

While it may not be pleasant to receive an adverse action notice, there is a plan of attack you can follow to overcome the challenges it presents. Diligently follow these steps to stay on top of your accounts.

By taking these steps to fix your credit, you will see improvement in your credit score and report – and sooner than you might think.

Rebecca Safier contributed to this report.

Published in Credit & Debt,